Australia is set to change how discretionary trusts are taxed starting July 1, 2028. The government will impose a 30% minimum tax on these trusts. This move aims to stop people from splitting income to pay less tax and will raise about $4.5 billion over several years.
What Are Discretionary Trusts and Why the Change?
Discretionary trusts let trustees decide who gets the income each year. They are popular for families and small businesses because they offer flexibility for tax planning, asset protection, and passing wealth to the next generation. Australia has over one million trusts, with about 840,000 being discretionary ones.
In 2022-23, these trusts distributed $142.4 billion in income. The government says trustees often send income to family members or entities with lower tax rates. This cuts the total tax a family pays. The new 30% minimum tax on discretionary trusts will make sure the trust pays at least that rate on its taxable income. Beneficiaries still report the income on their own returns.
How the 30% Minimum Tax Works
The trustee pays 30% tax on the trust’s income unless a higher rate applies. Non-corporate beneficiaries get non-refundable tax credits for what the trustee paid. Corporate beneficiaries, like bucket companies, do not get these credits. This targets setups that use companies to hold income at lower rates.
The tax matches the 30% rate many workers pay on income from $45,001 to $135,000. It closes a gap where trust income could be taxed less than wages.
Who Is Affected and Who Gets Exemptions?
Not all trusts face this tax. Fixed trusts, widely held trusts, superannuation funds, special disability trusts, deceased estates, and charitable trusts are exempt. Some income types also escape it, such as primary production income, income for vulnerable minors, non-resident withholding tax income, and certain testamentary trust assets.
About 90% of private trust wealth belongs to the top 10% of households. Small businesses using these trusts, around 350,000 or 15% of active ones, may feel the impact. Half of discretionary trusts might see no change if they already distribute to higher-tax beneficiaries.
Impact on Families and Small Businesses
Families that split income among low-tax relatives will pay more. They might need to rethink distributions or switch structures. Small businesses could pay salaries to working family members instead, as wages avoid the minimum tax.
Many will consider moving to companies or fixed trusts. This could end some tax advantages from flexible distributions.
Transition Help and Timeline
Relief starts July 1, 2027, for three years. It covers income tax and capital gains tax for those restructuring. The Australian Small Business and Family Enterprise Ombudsman will help from January 1, 2027. ASIC will aid those incorporating.
The tax begins July 1, 2028. Trustees have time to weigh if the trust still fits their goals.
Broader Tax Changes
This fits a larger budget plan. It includes replacing the 50% capital gains tax discount with cost-base indexation from July 1, 2027, a 30% minimum on real capital gains, and limits on negative gearing for new residential builds. The goal is to tax asset income more like wages.
Conclusion
The 30% minimum tax on discretionary trusts from July 1, 2028, will reshape tax planning for many families and businesses. While exemptions and relief soften the shift, it raises the cost of income splitting. Trustees should review their setups soon to decide on changes or adjustments.
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